Regulation is driving organizational reform in many ways. Future operating models for many banks are likely to be simpler, reflecting their withdrawal from different markets and business lines.

Streamlining structures

Banks have begun reviewing their legal entity structures. We recommend that they incorporate a review of internal structures and hierarchies with the goal of removing duplicate management and de-layering the organization.

The review should also incorporate a bank’s future-state structure across jurisdictions to deal with the rise of regulatory nationalism. Local regulatory requirements in individual jurisdictions have become clearer, particularly around capital levels (see chart).

Transforming cultures

Many banks have been deeply affected by compliance failures and conduct issues, and have begun a strategic assessment of how their organizations must change.

Much of the assessment focuses on risk culture, with the ultimate goal of striking a balance between risk management and sustainable growth.

The challenges for banks are ensuring that changes are embedded throughout the organization and new standards are followed. We expect to see a greater focus on strengthening internal transparency and monitoring to reduce operational risk, particularly as it relates to conduct.

Issues around shared services

Ring-fencing and resolution planning will require firms to consider which functions and services can be shared across different businesses and subsidiaries, and whether some should be housed in separate operating entities.

Location strategies will also be transformed, as banks explore offshoring and near-shoring options to reduce costs. However, it is vital to re-engineer any function before exporting it. This avoids introducing inefficient processes at a new location.

Emerging markets not exempt

Banks in emerging markets face unique challenges. They need to reform structures and key functions to manage businesses that have grown exponentially and to prepare for the next wave of expansion.

Risk management will require particular focus as increased staff sizes affect organizational culture and increased demand for credit stretches the capacity of the risk function. Strengthening systems, processes and oversight in these and other areas will be critical to securing additional funding and to developing alliances with other institutions.

Potential global capital requirements*

*US and other FSB member countries are working on additional bail in requirements which are likely to close the gap between Switzerland/UK and other countries in terms of going concern loss absorbancy. **The maximum Basel III GSIB buffer of 3.5% is not currently applicable to any institution. ***US GSIB requirements are expected to be announced by the end of 2013. **** Draft regulations for rules covering capital conservation buffer and countercyclical buffer expected in 2014/15. Source: Bank for International Settlements, national regulators, EY analysis.

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